How to Spend Money to Buy Happiness

By Kelly Dilworth

Published June 24, 2013

CreditCards.com

REUTERS

Given the choice of spending a chunk of your cash on a sleekly designed sofa or a weekend vacation with friends, which would you choose?

If your goal is to be happier about your purchase in the long-term -- not just in that fleeting moment after you click "add to cart" -- go with the vacation, says Harvard Business School professor Michael Norton.

"Every purchase we make means that we're giving up some other purchase," says Norton, who co-wrote the book "Happy Money: The Science of Smarter Spending" with fellow happiness guru Elizabeth Dunn, a professor of psychology at the University of British Columbia.

Too often, people spend what little money they have in ways that research shows won't make them happier, he says. They'll spring for a designer piece of furniture that will eventually just collect dust, for example, or spend more of their income on a bigger house miles away from where they work.

What people should do instead, says Norton, is think more deeply about where their money goes and save their cash for purchases that really do increase happiness -- such as unique experiences that can be savored and shared.

To make sure you're maximizing the amount of happiness you can get from the money you have, ask yourself: What can you do to get the most joy out of the cash you have on hand?

"It's a mindset that really takes some practice to develop," says Norton. To start, Norton and Dunn came up with five concrete ways you can spend more intelligently and increase your happiness, rather than subtract from it.

For example:

Buy memories, rather than stuff.

Splurge occasionally.

Delay gratification.

Spend your money on others, rather than yourself.

Invest `in purchases that will maximize your time, rather than detract from it

Here's more of what they learned while researching their book.

Q: One of the central themes of the book is that we can use the money we have to influence how we feel. So does money really buy happiness, if we spend it right?

A: That's right. I think that we often use our money to try to make ourselves feel better. We buy a bunch of stuff or we eat a lot of food. But it turns out that those things don't work. [In the book] we try to say: Here are some different and better ways to get more happiness out of your money.

Q: You've been researching this for a while. What inspired you to look more closely at how money impacts happiness?

A: We started thinking about this funny thing where many people who have a lot of money seem to be very unhappy. And it seemed strange. Because if you were happy when you were younger and then you had more money, why would you be less happy? In the end, we said: Maybe it's not so much about how much money you have, but what you do with the money that you have. Maybe, for people who are wealthy and unhappy, it's not that the money couldn't make them happy. It's just whatever they're doing with it doesn't seem to be working. Let's study that.

Q: What else surprised you in your research?

A: I think one of the key things that we found is that people's intuitions are all wrong. So, if we asked people: 'What would make you happier? Spending money on this? Or spending money on that?' They very often pick the thing that research shows is not going to make them that much happier. So we're fighting against intuitions that people have that are, in some sense, really, really wrong.

Q: Have your findings changed the way you personally spend?

A: They have, actually. One of the principles that I think is hardest for people -- and by people, I mean me -- to put into practice is the idea that we call "make it a treat." Whatever you like the best in life, take a week off from it and come back to it and it will be so much better and so much more amazing. I try to do that with the things that I really like the best. So, if you love having a latte everyday -- yes, it's going to be great every day you have one. But if you make yourself take a week off, the one that you have the following Monday will be so much better. You'll be so excited for it that you'll get more happiness out of that purchase.

Q: Is there anything else that you still personally struggle with when you're trying to follow through with the principles in your book?

A: Always. I think we constantly want things right away, and we also would rather not pay for them right now. What you really should do is make yourself pay for things way in advance and then wait for them. Our culture now is really all about getting things right away whenever we want them -- whether it's buying things on iTunes, downloading books on the Kindle or getting things next-day shipping. And all of that seems to make sense from a rational standpoint, which is that faster is better. But faster isn't always better for happiness, and it's difficult to always remind yourself that sometimes waiting for things can make you happier.

Q: Credit cards are one of the biggest culprits in encouraging people to consume now and pay later. Do you still use cards yourself?

A: Sometimes there are purchases that we absolutely need to make. So it certainly isn't the case that it's always bad to have credit card debt. I have shifted to try and pay for things upfront, for sure. But again, sometimes things in life come up that we have to put on our cards.

Q: You spoke earlier about how money can influence happiness, but it can also undermine it. What are some of the other ways that we spend money that can make us feel worse than we otherwise would?

A: Retail therapy. I think that a very intuitively appealing idea is that if I feel bad about anything, one way to fill that gap is to buy stuff. Even if I feel bad about, you know, my friend said something hurtful to me, instead of doing something about that feeling, I go and buy a TV. And I'll feel better while I'm buying the TV because we do like to buy things in the moment. But the TV is not going to make me any happier in my life. And it's also really not a very good substitute for social connection with friends. Instead, what we encourage people to do is to use your money to create more social connections. [For example,] taking a friend out to lunch is a way to do something nice for someone, but also get some "friend time" with someone, which we know is really important for your happiness.

Q: Time is an important theme in this book as well. You write that another way that we tend to mismanage our money is by buying things that eat up our time.

A: That's absolutely right. The classic case of this is buying a house in the suburbs. It seems amazing, so of course we would like to have a nicer house or a nicer apartment or a nicer condo. But very often, in order to do that, we have to move farther from our place of work. So we're thinking: 'Wow! I'm going to spend so much amazing time in this new house that I bought, in this backyard, and we're going to be barbecuing and swimming in the pool and it'll be such an amazing, happy life.' And you forget that, actually, what you're going to do is everyday of your life spend two hours in traffic commuting all the way from that house to your job and back. Yes, you're going back to your nice house and your family. But after you've been in traffic, angry for an hour, it's very unlikely that you're going to be really happy when you get home.

Q: What are some of the ways that we can use our disposable income to better manage our time? For example, you write about some of the convenience purchases that we can make, such as a vacuumcleaner that will do our vacuuming for us.

A: Think about the things you hate doing most in life. Luckily for us, businesses often develop products to try to help us with those. For example, if you hate vacuuming and you can buy a Roomba, which will vacuum your house for you automatically, you might say, 'I have a vacuum cleaner. I can't really afford buying a Roomba and it's a bit of a frivolous purchase.' But if you think about, for example, all the money you spend on coffee each week -- imagine if you gave coffee up for a month and saved $4 every single day. Now, the coffee isn't really going to make you that much happier. We can show that in our research. If you gave that up and got a Roomba -- if you hate vacuuming -- you are going to increase your happiness over the course of that month. The things that seem frivolous can actually make perfect sense because there are other things we're buying that, in fact, are frivolous in terms of impacting our own happiness.

Q: According to your research, one thing that makes us feel like we actually have more time -- and so makes us happier -- is helping others. What about spending money on others?

A: If you want to be a happier person, one of the best ways to do it is to be nice to other people. If we force people in our research to spend money on themselves or spend money on other people, we see time and time again that spending money on other people makes you happier than using that same money on yourself.

Q: Is there anything else people can do with their money that may influence their day-to-day happiness?

A: There's a lot of research now that suggests that experiences are a much bigger source of happiness than material things. And if you think about it, that makes a lot of sense. Because imagine you have a vacation coming up in two weeks. You're really looking forward to that vacation. You're sitting in your cubicle. It's snowing out and you're fantasizing about the beach in two weeks. Those two weeks of anticipation for that experience is an enormous source of excitement in itself. You look forward to vacation much more than you look forward to buying a TV. Then, the vacation itself is much more fun than watching TV, in part because, on vacation, you often are with someone else, which is good for your happiness. Then, if you think about after that experience is over, we remember experiences and we look back at pictures and we reminisce and we get happy all over again. We very rarely reminisce about the moment that we bought our TV.